Good Afternoon,
The month of January saw the ‘Magnificent 7’ (Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft, Tesla) in the US continue to prop up the market, along with further announcements from the Fed.
January Market Performance:
- Bonds:
- VAB – Canadian Aggregate Bond Index ETF: -2.0%
- VBU – US Aggregate Bond Index ETF: -0.7%
- VBG – Global ex-US Aggregate Bond Index ETF: -1.0%
- Equity:
- S&P500: 1.6%
- DOW: 1.2%
- TSX: 0.3%
- FTSE100: -1.3%
- NASDAQ: 1.0%
The Federal Reserve in the US kept its interest rate at 5.5%, which was in line with market expectations going into the meeting. Fed Chair Jerome Powell did state that reducing rates sometime this year would be appropriate, but rate cut decisions will be made on a meeting-by-meeting basis, and he does not think a March rate cut is likely at the present time. This sentiment was not what the market was hoping for and resulted in more volatility.
The Bank of Canada also kept its interest rate unchanged at 5%. The BoC expects headline inflation to remain near 3% for the first half of 2024, which would warrant the interest rate to remain at a restrictive level.
As mentioned above, the largest mega-cap tech names in the S&P500 kept the market propped up for the month, except for Tesla, which after reporting a -23% gross profit in Q4, and a year-over-year operating income decline of -47%, shares dropped -23.9% for the month.
2023 saw these massive tech companies surge as a part of the initial AI boom. 2024 could in theory be more of the same, but with only 7 companies dictating the direction of the entire S&P500, it can result in concentration risk, and the valuation of shares have become rather expensive.
The composition of different indexes varies, but with so much of the S&P500 being made up of tech, the valuation of the index has soared on a relative basis.
PE Ratio (12 month Forward Consensus EPS)
- S&P500 = 20x
- TSX = 14x
- International = 14x
- EM = 12x
Historically, the higher the PE Ratio, the lower the returns in the subsequent 1 and 3 year periods. One of the most important things to do is remain invested across multiple asset classes and geography to help mitigate concentration risk and keep valuations lower.
